India Metal and Mining-- Taxing times ::Macquarie Research,

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India Metal and Mining
Taxing times
Event
 Approval of the new MMRD bill: Cabinet Ministers, Government of India,
have approved the new mining bill. But an important hurdle is yet to be
crossed, which is Parliament’s approval. Overall, this is negative for existing
pure mining companies where profits could be impacted by 9-12%.
Impact
 Taxes and more: The new draft proposal calls for a 26% share of profits for
coal mining; for non-coal mining, the new liability is equivalent to royalty paid.
This will go for the development of local communities which were the
traditional land owners of the mining area. To put this in perspective, the
government collected $1bn in terms of royalty in FY10 (from minerals other
than coal) and a 26% tax on mining profits for Coal India could add another
$650mn to this fund. Also, a cess on royalty of 10% going to State and 2.5%
to the Central government will be levied. Including these proposals, the metal
sector in India for some commodities will be at the highest end of taxation.
 Still some time to go: The bill has to be tabled in the Parliament next, which
can suggest changes to the bill as well. Only after an approval from
Parliament is received will the bill become an act. The current bill has a lot of
areas still not explained, for instance, how should coal mines allocated for
captive use be taxed, will companies be given benefits for CSR expenses etc.
These issues can be raised in the Parliament before an approval is given.
 Could attract investment in medium term: The Act opens up opportunities
by providing for cluster development of smaller mines, making the awarding of
licenses time bound, introducing the open-sky policy for the Reconnaissance
Permit, seamless transition from prospecting to mining licenses as well as
introducing transferability of PL/ML. These changes could help attract foreign
investment as returns become more assured and process becomes simpler.
Outlook
 Coal – impacted the worst with a 26% tax on profits. Coal India might be
able to pass it on as it did pass a 5% Central Excise duty imposed in the
budget last March. However, it will become less competitive compared to
imports and we expect a PE de-rating will happen.
 Iron ore will have to be absorbed: With this, iron ore taxation rises above
70%. We believe that, as iron ore prices decline, the industry will see tax cuts.
 Steel – little impact: The impact should be about $5/t and can be partly passed.
 Zinc and lead – have to be absorbed: The impact on zinc and lead is linked
directly to international prices, given the nature of royalties. We believe this
will have to be absorbed.
 Aluminium – negligible impact: The low contribution of bauxite in the value
chain has reduced the impact on aluminium.
 Cement – The impact may be close to Rs3/bag, unlikely to be passed on in
this oversupplied market.